Buffett profits as venture in Canadian mortgage business ends

NEW YORK (Reuters) - Billionaire investor Warren Buffett is cutting ties with a Canadian mortgage business after a nifty trade that provided the company with a potential lifeline.

FILE PHOTO: Warren Buffett, CEO of Berkshire Hathaway Inc, plays bridge as part of the company annual meeting weekend in Omaha, Nebraska U.S. May 6, 2018. REUTERS/Rick Wilking/File Photo

Buffett’s Berkshire Hathaway Inc (BRKa.N) is “substantially” exiting its stake in Home Capital Group Inc (HCG.TO) after selling shares back to the company, the Canadian mortgage lender and Buffett said on Wednesday.

Shares of Home Capital tumbled as much as 19 percent in early trading before paring losses to trade down 13.2 percent to C$14.30 at midday.

Berkshire bought a 20 percent stake in Home Capital last year and extended a C$2 billion credit line after the Canadian company suffered a deposit exodus resembling a bank run after being accused of, and then admitting to, concealing mortgage fraud. Home Capital reached a settlement with the Ontario Securities Commission in June last year. [nBw8F6c4va]

Berkshire’s investment and Buffett’s vote of confidence sent Home Capital shares rallying when the investment was announced.

“Buffett was brought in as a short-term stopgap,” said Marc Cohodes, a short seller betting against Home Capital, who believes the deal with Buffett did not help the average Home Capital shareholder. “He sold his name to Home Capital and the Canadian government.”

Buffett burnished his reputation as a lender of last resort in the aftermath of the 2007-2009 global financial crisis, buying high-yielding stocks and bonds in companies including Bank of America Corp (BAC.N).

In this case the cost of the folksy Omaha investor’s help was high.

The credit line carried a 9 percent interest rate and in May Home Capital said it was replacing it with new, lower-cost credit from an undisclosed lender.

Berkshire could see a profit of more than 70 percent for the shares it bought for around C$9.55 apiece in June 2017 and sold back to the company at C$16.50 per share.

“He single-handedly improved the odds of his investment just by getting involved,” said John Huber, managing member at Saber Capital Management LLC, which owns Berkshire shares.

The $153 million initial investment was small in relation to the $103.6 billion Berkshire has in cash and similar holdings. Berkshire initially planned to take a greater stake in the company, a move that had Home Capital’s blessing. But shareholders resisted, and proxy advisory firm Institutional Shareholder Services said the deal to sell shares to Berkshire at a discount would substantially dilute the value of other investors’ holdings with little additional benefit.

In a statement, Buffett said that Berkshire’s investment was “not of a size to justify our ongoing involvement” because shareholders did not approve the additional investment and Home Capital repaid its credit line.

“We are delighted to see Home Capital back on its feet with healthy liquidity and a solid capital position,” Buffett said. “Although we have decided to substantially exit from our investment, we will continue to cheer from the sidelines for our friends at Home.”

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Berkshire’s exit nonetheless comes as a housing slowdown and a sharp slide in oil prices put pressure on Canada’s economy.

“Buffett is looking at the Canadian economy much the way everybody else is and is getting out of HCG at a profit while he can,” said Jared Dillian, an independent investment strategist who is betting the value of the Canadian dollar will fall. “Buffett has done a lot of things right over the last year or two. He kept a large cash position even when he was criticized for doing so. He didn’t make any deals on the highs.”